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A common criticism of this type of debt sustainability analysis is that assuming an exogenous interest rate is wrong since interest rates depend on default

A common criticism of this type of debt sustainability analysis is that assuming an exogenous interest rate is wrong since interest rates depend on default risk (and vice-versa). In this exercise we will use a very simple default risk model to get an equilibrium interest rate. Suppose the probability of default p is described by the following specification

image text in transcribedimage text in transcribed
b P= 20 if 0

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